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Negotiable instrument act, 1881
Meaning: - a negotiable instrument means an instrument the property in which is
acquired by any one who takes it bonafide and for the value notwithstanding any defect in
the title of the prior party.
Definition [sec 13]
A negotiable instrument means
- A promissory note; or
- Bill of exchange; or
- Cheque
- Payable either to order or
bearer.
CHARACTERISTICS OF NEGOTIABLE INSTRUMENT
{SEC 13}
1. Freely transferable from one person to another person.
2. The holder in due course obtains good title of the instrument notwithstanding any defect
in the previous holder.
3. HDC of a negotiable instrument can sue on the instrument in his own name.
4. Transferable infinitum.
PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT {sec 118}
1. CONSIDERATION:-Every negotiable instrument was made,
or drawn for consideration
accepted, endorsed
2. DATE: - every negotiable instrument bearing a date was made or drawn on that date.
3. Time of acceptance: - every bill of exchange was accepted within a reasonable time
after the date mentioned on it but before of its maturity.
4. Time of transfer:- every transfer of negotiable instrument was made before its
maturity.
5. STAMP:-lost promissory note, bill of exchange or cheque was duly stamped.
6. HDC: - that the holder of N/I is a HDC.
Promissory note
{sec. 4}
A promissory note is an instrument in writing {not being a bank note or currency note}
containing an unconditional undertaking signed by maker to pay a certain some of money
only to
{a}a certain person; or
{b} the order of a certain person.
Promissory Note
{Sec. 4}
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Definition: - A ‘Promissory note’ is an instrument in writing (Not being a bank- note or a
currency note) containing an Unconditional undertaking signed by the maker to pay a
Certain sum of money only to a certain person; or the Order of a certain person.
Essentials Characteristics of a Promissory Note
1. Writing: - Promissory note must be in writing. Writing includes print and typewriting.
Oral promise can not
Constitute a valid promissory note. Generally consideration, Place and date of making
need not be mentioned on the promissory note.
2. Promise to pay:(a) A Promissory note must contain an undertaking/
Promise to pay.
(b) Mere acknowledgment of debt is not sufficient.
(c) Use of word “promise’’ is not mandatory, but the maker should bind himself to pay.
EX.:- “I have received a sum of Rs. 5,000 from Sohan. This amount will be repaid on
demand’’.
3. Unconditional promise:(a) The undertaking/ promise to pay should be unconditional and definite.
(b) Unconditional event means an event which is certain to happen but the time of its
occurrence is uncertain.
Examples:- “I promise to pay B Rs. 500, seven days after may marriage with C’’ cannot
constitute a promissory note because a condition as to marriage is attached. A writes – “I
promise to pay
C Rs. 25,000, 7days after the death of B’’. This is a valid promissory note and is not
conditional, since only the time of death of B is uncertain, but is sure to happen.
4. Signed by the maker:-Promissory note should be signed by the maker himself. Where it
is written and the name of the maker appears in the instrument, but is not signed, it shall
not constitute a valid promissory note.
5. Payee to be a certain person: - Promissory note should specify the payee in clear terms
i.e. by name, son of, and resident of, etc. The payment can also be identified by
description.
6. Certain some of money:- Sum payable must be certain or capable of being made certain.
The sum shall be deemed to be certain when the rate of interest is specified. Money may
be payable in installments is also a valid promissory note.
Examples:- “I promise to pay Balu, Rs. 10,000, and all other sums which shall be due’’
is not valid since the sum is not certain.
7. Payment of Money only:- There must be a promise to pay only money and not other
consideration, e.g. “I promise to pay B a sum of Rs. 50,000 and deliver him my Scorpio
Car’’ is not valid.
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8. Duly stamped and dated:- Stamps of requisite amount and description must be affixed
on the instrument and duly cancelled either before or at the time of its execution. If the
promissory note is not dated, it is presumed to have been made on the date of its delivery.
Bill of exchange
{Sec. 5}
Definition: - A ‘bill of exchange’ is an instrument in Writing containing an unconditional
order, singed by the maker, directing a certain person to pay a certain a sum of money
only to, a certain person; or the order of a certain person; or the bearer of the instrument.
Essentials Characteristics of a Bill of Exchange
(a) It must be in writing
(b) It must contain n expresses order to pay
(c) The order to pay must be definite and unconditional
(d)
It must be signed by the drawer
(e) The sum contained in the order must be certain
(f)
The order must be to pay money only
(g) Drawer, drawee and payee must be certain (usually, same person is the drawer and
payee)
(h) It must be stamped.
Parties to a Bill of Exchange
(i)
Drawer:- The person who draws the bill (i.e., the person who makes the bill) is called a
drawer. His liability is secondary and conditional. His liability is primary and conditional
until the bill is accepted.
(ii) Drawee:- 1. The person on whom the bill is drawn is called as drawee.
2. On acceptance of the bill- He is called as Acceptor, he becomes liable for the payment
of the Bill; his liability is primary and unconditional.
(iii) Payee: - The person to whom money is to be paid is named in the bill. He is called as
payee.
Cheque {Sec. 6}
Definition:- cheque is a bill of exchange, drawn on a specified banker and not expressed to
be payable otherwise than on demand. It includes, the electronic image of a truncated
cheque; and a cheque in the electronic form.
Meaning of Truncated cheque:- A “Truncated cheque” means a cheque which is truncated
during the course of a clearing cycle, either by the clearing house or by the bank whether
paying or receiving payment, immediately on generation of an electronic image. For
transmission, substituting the further physical movement of the cheque in writing.
Meaning of a cheque in electronic form:- A “Cheque in the electronic form” means a
cheque which contains the exact mirror image of a paper cheque, and is generated, written
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and signed in a secure system ensuring the minimum safety standards with the use of
digital signature and asymmetric crypto system.
Essentials characteristics of a cheque:(a) The definition starts with the “cheque is a bill of exchange” so it must satisfy all the
essential features of a valid bill of exchange.
(b) It is always drawn on a specified banker. Banker includes any person acting as a banker
and any post office saving bank [Sec. 3].
(c) It is always payable on demand and not otherwise
Form of cheque: - A cheque may be drawn in 3 forms:(1.)
(2.)
(3.)
Bearer cheque: - Expressed to be payable to bearer or the last endorsement is an
endorsement in blank.
Order cheque: - Expressed to be payable to order, or which is expressed as payable to a
particular person with no prohibition on its transfer.
Crossed cheque: - Cheque that can be collected only through a banker.
Meaning of crossing:- Crossing means a direction given By the drawer of the cheque
to the drawee bank, not To pay the cheque at the counter of the bank. The Payment can
be collected only though a banker.
Types of crossing
Nature of crossing
General crossing
Special crossing
{Sec. 123 to 131 A}
Requirements
The cheque must contain two
parallel Transverse lines
The cheque must contain the name
of a banker. Special crossing may
be made only once
Effects
The cheque must be paid only
to a banker
Cheque must be paid only to
the banker to whom it is
crossed. Special crossing can
not be converted into general
crossing.
Not negotiable crossing The cheque must contain the words The cheque nevertheless
‘not negotiable’. The cheque must remains negotiable. The title
be crossed generally or specially
of the transferee shall not be
better than the title of the
transferor.
A/c payee crossing, i.e.
restrictive crossing
The cheque must contain the words The cheque does not remain
‘A/c payee’ or ‘A/c payee only’.
negotiable anymore.
The cheque must be crossed
Based on transfer procedure
Generally or specially
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Bearer Instrument [Sec. 13]:- An instrument which is expressed to be payable to bearer
or an instrument on which the last endorsement is in blank. Promissory note can not be
made payable to bearer. Bill of exchange- can not be made payable to bearer on demand.
Order Instrument:- An instrument payable to a specified person or his order. Order
instrument can be transferred by endorsement and delivery.
Based on location:Inland Instrument:- A negotiable instrument is an inland instrument if, it is drawn or
made in India;
It is payable in India or is drawn on a person resident in India. An inland instrument
remains inland even if it has been endorsed to a foreign country.
Foreign Instrument [Sec. 12]:-A negotiable instrument which is not an inland
instrument is called as foreign instrument.
Based on payment:Demand Instrument:- An instrument which is expressed to be payable on demand. An
instrument on which time for payment (i.e. maturity date) is not specified.
Time Instrument:- An instrument in which time for payment(i.e. maturity date) is
specified. A time instrument may be payable- on a specific day; or after a specified
period; or certain period after sight; or on happening of an even which is certain to
happen.
Maturity of a Negotiable Instrument {Sec. 22}
Meaning:- It means the date on which the negotiable instrument falls due for payment.
Days of grace:- A negotiable instrument which is payable otherwise than on demand is
entitled to 3 days of grace.
Calculation of days of maturity {Sec. 23 to 25}
CASE
DATE OF MATURITY
Negotiable instrument payable on a
specified day.
Specified day + 3rd day
Negotiable instrument payable on a
stated number of days after date
Date on which negotiable instrument is
Drawn + stated number of days + 3rd day
Negotiable instrument payable on a
stated number of days after sight
Date on which negotiable instrument is
presented for sight + stated number of
days + 3rd day
Negotiable instrument payable on a
stated number of days after happening
Date on which such event happens +
stated number of days + 3rd day.
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of a certain event
(a)
(b)
(c)
(d)
Negotiable instrument payable on
stated number of month after date.
Corresponding day of the relevant month
(i.e., date on which negotiable
instrument is drawn + stated number of
month) + 3rd day
Negotiable instrument payable on
stated number of month after sight
Corresponding day of the relevant month
(i.e., Date on which negotiable
instrument is presented for sight + stated
number of months) + 3rd day.
Negotiable Instrument payable on
stated number of months after
happening of a certain event
Corresponding day of the relevant month
(i.e., Date on which such event happens
+ stated number of months) + 3rd day
If the day of maturity of negotiable
instrument is a public holiday
If the day of maturity of negotiable
instrument is an emergency or
unforeseen public holiday
Immediately preceding business day
Immediately succeeding business day
Note:- If in the relevant month, there is no corresponding day, the last day of such month
shall be taken.
Incomplete / Inchoate Instrument {Sec. 20}
Conditions for an inchoate instrument:A person signs a negotiable instrument.
The negotiable instrument is stamped.
The negotiable instrument is either wholly blank or is partially blank.
The person signing such negotiable instrument delivers it to another person.
Legal effect:- The holder gets a prima facie authority to make or complete the negotiable
instrument.
Liability on an inchoate instrument:Rights of a person to whom an inchoate instrument is delivered – He can recover only
such amount as he was authorized to fill. Rights of holder in due course – He can recover
the whole amount stated in the instrument, but not exceeding the amount covered by the
stamps.
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Accommodation Bills {sec. 43}
An accommodation bill means a bill which is drawn, accepted without consideration.
Provision relating to such bills: ( a) The accommodated party cannot, after he has paid the amount of the bill, recover the
amount from any person who become a party to the bill for his accommodation.
( b) The person who become the holder of such a bill in good faith and for consideration,
after maturity, may recover the amount from any prior party.
Negotiation {sec 14}
Meaning: Negotiation means transfer of a negotiable instrument to any other person so as to
constitute that person the holder of such negotiable instrument.
Methods of negotiation: *Negotiation by delivery –
1. A bearer instrument may be negotiated by delivery.
2. The delivery must be voluntary
*Negotiation by endorsement and delivery
An order instrument can be negotiated only by way of
1. Endorsement; and
2. Delivery.
Endorsement {sec 15}
When the maker or holder of a negotiable instrument signs the same
*otherwise than as such maker
*for the purpose of negotiation
*on the back or face thereof or on a slip of paper annexed thereto,
*or so sign for the same purpose a stamped paper intended to be completed as a
negotiable instrument
*he is said to endorse the same, and is called the ‘Endorse’.
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The person in whose favour the endorsement made is called ‘Endorsee’.
EFFECT OF ENDORSEMENT
The endorsement of an instrument, followed by delivery, transfers to the endorsee the
property in the instrument with right of further negotiation.
TYPES OF ENDORSEMENT
1. Endorsement in blank
*Endorsement in blank means an endorsement made by the endorser without writing
the name of the endorsement.
*The instrument is payable to bearer even though originally payable to order.
2. Endorsement in full
Special endorsement means an endorsement made by a holder by(a) Signing his name; and
(b) Added a direction to pay the amount to a specified person.
2. Restrictive endorsement
*An endorsement which restricts the right of further negotiation is called as restrictive
endorsement.
4. Partial endorsement
*An endorsement which purports to transfer only a part of the amount of the
instrument is called as partial endorsement. Partial endorsement is not valid at law.
5. Conditional endorsement
An endorser may, by express words in the endorsement(a) Make his liability, or
(b) Make the right of endorsee to receive the amount
Depend upon the happening of a certain event, although such event may never happen.
Negotiation Back {Sec. 90}
Meaning
When an endorser, after he has negotiated an instrument, again becomes a holder
before its maturity, the instrument is said to be negotiated back to that holder.
Effect:1. In a negotiation back, none of the intermediate holder / endorsers is liable to the
holder.
2. The general rule, that a holder in due course may sue all prior parties to the
instrument does not apply.
3. However, where a prior party has excluded its liability on the instrument and the
negotiable instrument is negotiated back to him, he may sue all intermediate
endorsers.
Distinction between Negotiation and Assignment:Basis
Negotiation
Assignment
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Applicable
Act
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If a negotiable instrument is
transfer by way of negotiation,
Negotiable Instrument Act, 1881
applies.
Negotiation means transfer of a
negotiable instrument to any other
person so as to constitute that
person the holder of such
negotiable instrument.
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Where any right is transfereed by
way of assignment, the Transfer
of Property Act applies.
Transfer of a right to receive the
payment of a debt by one person
(viz., assignee) to another person
(viz., assignee) by way of a
written document is called as
assignment.
Negotiation can be made for Assignment can be made of any
Scope
transferring negotiable instrument right.
only.
Method
or A bearer instrument can be Assignment is valid only if it is
negotiated merely by deliver, and made in writing and is signed by
manner
an order instrument can be the assignor.
negotiated by endorsement and
delivery.
Notice of negotiation is not Notice of assignment must be
Notice
required to be given to any party.
given by the assignee to the
debtor.
Consideration It is presumed that every There is no such presumption in
negotiable
instrument
was case of assignment.
negotiated for consideration.
Burden
of The other party has to prove that The assignee has to prove that
negotiation was without any there some consideration.
proof
consideration.
The transferee of a negotiable The assignee does not acquire a
Better title
instrument acquires a title better title better than that of the
than that of the transferor, i.e; he assignor.
becomes a holder in due course.
Negotiation does not require Assignment requires payment of
Stamp duty
payment of stamp duty.
stamp duty.
Meaning
HOLDER {Sec. 8}
A holder of a negotiable instrument is a person entitled in his own name to the possession
there of and to receive or recover the amount due an negotiable instrument from the
parties liable on negotiable instrument.
HOLDER IN DUE COURSE
{Sec. 9}
A ‘holder in due course’ is a person who*must be a holder.
*must have become the holder for consideration.
*must have obtained the possession of negotiable instrument before maturity.
*must have obtained the negotiable instrument in good faith.
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PRIVILEGES OF A HOLDER IN DUE COURSE
1. Every prior party to a negotiable instrument is liable to a HDC.
2. A holder who derives title from HDC has the same right as that of a HDC.
3. No prior party can set up a defence that the negotiable instrument was drawn, made or
endorsed by him without any consideration.
4. No prior party can set up a defence that the negotiable instrument was lost or was
obtained from him by offence or fraud or for an unlawful consideration. Thus, HDC
gets a valid title to the negotiable instrument even though the title of the transferor was
defective.
5. No prior party can allege that negotiable instrument was delivered conditionally or for
a special purpose only.
6. HDC can claim full amount of the negotiable instrument (but not exceeding the
amount covered by the stamp) even though such amount is in excess of the amount
authorized by the person delivering an inchoate negotiable instrument.
Difference between holder and HDC
BASIS
HOLDER
HDC
A person becomes a holder even if A person becomes HDC only
Consideration
he obtains the negotiable instrument if he obtains the negotiable
without any consideration.
instrument for consideration.
Before maturity A person becomes a holder even if A person becomes HDC only
he obtains the negotiable instrument if he obtains the negotiable
after the maturity of the negotiable instrument before its maturity.
instrument.
A person becomes the holder, even if HDC, a person who obtain the
Good Faith
he does not obtain the negotiable negotiable instrument on good
instrument in good faith.
faith.
A holder is not entitled to the A HDC is entitled to various
Privileges
privileges, which are available for privileges as specified under
HDC.
the negotiable instrument act,
1881.
A holder can not sue all the prior A HDC can sue all the prior
Right to use
parties.
parties.
PAYMENT IN DUE COURSE
1. Payment is made as per apparent tenor
2. Payment is made in good faith
3. Payment is made without negligence
4. Payment is made in money only.
ACCEPTANCE {Sec. 7 and 86}
(a) The drawee signs the bill; and
Meaning of
(b) The drawee delivers it to the holder of the bill; or the drawee
acceptance
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(sec.7)
Effect
(sec.7)
Essential of
a
valid
acceptance
(sec. 7)
Types
of
acceptance
(sec. 86)
Effect
of
qualified
acceptance
(sec. 86)
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gives notice of acceptance to the holder of the bill.
The drawee becomes the acceptor.
(a) Written (whether on the face or back of the bill)
(b) Signed (signature without the word ‘accepted’ is also valid)
(c) Signing on the bill
(d) Delivery or intimation to the holder that the has been accepted.
(a) General- Acceptance of bill without any qualification.
(b) Qualified- Acceptance of bill subject to some qualification (e.g.,
accepting the bill subject to the condition that the payment of bill
shall be made only on happening of an event specified there in.
(a) The holder may object to the qualified acceptance. In such a case,
it shall be treated that the bill is dishonoured due to nonacceptance.
(b) He may give his consent to the qualified acceptance. In such a
case, all the previous parties, not consenting to it, are discharged.
MATERIAL ALTERATION
Meaning:An alteration is called as material alteration if it alters*the character or operation (i.e. the legal effect) of a negotiable instrument, or
*the rights and liabilities of the parties to a negotiable instrument.
What is material alteration?
What is NOT Material Alteration?
Alteration regarding(a)Date,
(a)Filling blank of the instrument,
(b)Time of payment,
(b)Conversion of blank endorsement into
(c)Place of payment,
endorsement in full,
(d)Sum payable
(c)Crossing of Cheque,
(e)Opening a crossed cheque,
(d)Conversion a General Crossing into
(f)Relationship between parties,
Special Crossing, like addition of word
(g)Converting an order cheque into a “A/c payee” or “Not Negotiable”.
bearer cheque.
(e)Cancelling the word bearer and making
cheque payable to order.
(f)Alternation made with the consent of the
parties.
Effect of a material alteration {sec. 87}
*Any material alteration of a negotiable instrument renders the same void as against any
One who is a party there at the time of making such alteration and does not consent
thereto.
*But, a material alteration is valid, if it was made so as to carry out common intention
of the original parties.
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DISCHARGE OF A NEGOTIABLE INSTRUMENT
Payment in due course:*A negotiable instrument is discharged if the party primarily liable on the negotiable
instrument makes the payment in due course.
*When the payment is made, the negotiable instrument must be cancelled or the fact of
payment must be recorded negotiable instrument.
Cancellation:Where the holder cancels the name of the party primarily liable on the negotiable
instrument, with intent to discharge him, the negotiable instrument is discharged.
Release:Where the holder releases or renounces his right against the party primarily liable on the
negotiable instrument, the negotiable instrument is discharge.
Negotiation back:Where a party primarily liable on a negotiable instrument becomes the holders of the
negotiable instrument, the negotiable is discharged.
DISCHAGE OF A PARTY {Sec. 82 to 90}
Payment:Payment by a party who is secondarily liable on a negotiable instrument discharges the
holder and all parties subsequent to the party making payment of the negotiable
instrument.
Cancellation:Where the holder cancels the name of any party liable on the negotiable instrument
(other than the party primarily liable on the negotiable instrument), such a party and all
parties subsequent to him are discharged.
Release:Where the holder releases any party liable negotiable instrument (other than the party
primarily liable on the negotiable instrument), such a party and all parties subsequent to
him are discharged.
Allowing drawee more than 48 hours to accept:All prior parties not consenting to the same are discharged from liability to such holder.
Qualified acceptance:Where a holder of the bill consents to qualified acceptance, all the prior parties who did
not consent to qualified acceptance are discharge.
Material alteration:Every party not consenting to a material alteration negotiable instrument is discharged.
Negotiation back:Where a party already liable on the negotiable instrument becomes the holder of
negotiable instrument, such a party and all intermediate parties to whom such a party
was previously liable shall be discharge.
Operation of law:-
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*A party is discharged if the negotiable instrument becomes time barred.
*A party is discharged if he is declared as an insolvent by the court.
Dishonour by Non- Acceptance {sec. 91}
A bill is dishonoured by non- acceptance if it is duty presented for acceptance, but the
drawee refuses to accept the bill.
Cases in which bill are dishonoured by non- acceptance:(a) When the drawee makes default in acceptance upon being duly required to accept the
bill.
(b) In case there is two or more drawee who are not partners, if the bills is not accepted
by all the drawee.
(c) Where the drawee is a fictitious person.
(d) When the drawee can not be found even after a reasonable search.
(e) When the drawee is incompetent to contract.
(f) Where the drawee gives a conditional acceptance and the holder does not give his
consent to the conditional acceptance.
Effect:*The holder gets an immediate right to sue all the prior parties.
*He need not wait till the maturity of the bill for it to be dishonoured on presentment
for payment.
Dishonour by Non- Payment {sec. 92}
A negotiable instrument is dishonoured by non- payment, when presentment for
payment is excused and the instrument remain unpaid after maturityIn case of
Default in payment made by
Promissory note
Maker of the note
Bill of Exchange
Acceptor of the bill.
Cheque
Drawee of the Cheque.
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